INCOME TAX APPELLATE TRIBUNAL - MUMBAI BENCH 'D'

IT Appeal No. 5997 (Mum.) of 2011
[ASSESSMENT YEAR 2008-09]

I.P. BANSAL, JUDICIAL MEMBER
AND RAJENDRA, ACCOUNTANT MEMBER

Farrokh V. Irani for the Appellant.
S.K. Singh for the Respondent.

ORDER

The order of the Bench was delivered by

I.P. Bansal, Judicial Member — This appeal is filed by the Assessee. It is directed against the order passed by the ld. CIT(A) dated 29.06.2011 for the assessment year 2008-09. The grounds of appeal read as under :—

"Ground No.1

2. The Assessee is engaged in the business of trading and merchandising of goods and services. This is the first year of operation. The company has turnover of Rs.4.74 crores on which net loss of Rs.1,87,507/- is shown in the P&L Account. In the Balance Sheet the assessee has shown capital work-in-progress amounting to Rs.9,40,80,983/- . Out of the said amount the assessee has claimed an amount of Rs.3,64,49,545/- as revenue expenditure and has claimed this amount in the computation of income filed with the return of income. Thus, a loss of Rs.3,15,16,626/- has been claimed after adding back an amount of Rs.51,23,957/- under the provisions of Section 40A(7)/ 40A(9)/43B.

2.1 Noting from the return that the assessee has claimed revenue expenditure of Rs.3,64,49,545/- out of capital work-in-progress, the AO required the assessee to explain about the allowability of the said amount. Vide letter dated 9.11.2010 it was submitted that these expenditures are mainly salary; travelling; communication; and, therefore, eligible for deduction under section 37(1) of the Act. Another reply dated 02.12.2010 was also filed which has been reproduced in the assessment order in para 4.1 at pages 2 to 5 of the assessment order. In sum and substance the contentions of the assessee are as under :—

2.2 For completion of facts and details the reference can be made to following tables which are filed by the assessee before Ld. CIT(A):
Details of Capital Work in Progress:

Details of Project Development Expenditure:

Disallowance made by the assessee u/s. 40A(7)/40A(9)/43B in computation:

2.3 The aforementioned submissions of the Assessee have been rejected by AO with the reasoning given by him in para 4.2 which read as under :—
"4.2 The argument of the assessee is considered carefully and the same is not acceptable for the following reasons:

2.4 It is in the above manner that Ld. AO has disallowed Rs.3,64,49,545/-. As the entire amount was disallowed, Assessing Officer has accepted the alternative contention of the Assessee and did not make further disallowance of Rs.51,23,957/- which already included in the addition of Rs.3,64,49,545/-.

3. Aggrieved, the Assessee filed an appeal before the CIT(A). The submission made before AO were reiterated . Ld. CIT(A) required the Assessee to file the details of outlets, their income and expenditure apportionment of expenditure capitalized and claimed as revenue, nature of work done along with proof of work done by the employees to whom salaries were paid which formed major chunk of expenditure and also nature and break-up of other expenditure claimed vide noting on order sheet dated 08.06.2011. The reply was filed by the Assessee vide letter dated 28/06/2011. Ld. CIT(A) after going through the details submitted by Assessee observed that the Assessee has given merely names, designation and amount paid with reference to the salary paid without giving any proof of the work actually having been done. Therefore, the ld. CIT(A) held that the Assessee had failed to prove that the expenditure was incurred wholly and exclusively for the purpose of business. Ld. CIT(A) has further observed that the appellant has failed to give details of outlets along with income along with expenditure of the unit whereas the basis for apportionment of expenditure capitalized and claimed as revenue has also not been given(sic). On these facts and the reasoning given by the AO in the assessment order, the ld. CIT(A) has held that the said amount was not allowable as same is not on revenue account. In this manner ld. CIT(A) has rejected the appeal of assessee.

4. After narrating the facts it was submitted by Ld. AR that during the year under consideration business was started by operating two stores at Hyderabad and Bangalore in phased manner. The assessee has achieved a turnover of Rs.4.75 crores from these two stores. The assessee was in the process of opening more stores in the phased manner for which the assessee was requiring manpower as well as fixed assets and equipments etc. The expenditure on such items was shown as " Project Development Expenditure". By the end of the year a total sum of Rs.9.40 crores was expended by the assessee. Out of the said total amount a sum of Rs..3.64,49,545/- was identified by the assessee which mainly consists of payments made to employees. These expenses from their very nature are revenue as it can be seen from the details. Therefore, the assessee in the computation of income filed alongwith return claimed the same as revenue expenditure. He submitted that the undisputed fact is that these expenditure are incurred for the expansion of business which is already in existence.

4.1 He further submitted that business of the Assessee constitutes one indivisible business with centralized administration. The major policies are formed at central level. Modus operandi of all business policies is same and thus according to facts there is inter-connection, inter-lacing, inter-dependence, common management, common business organization, common funds and common administration. Ld. A.R pointed out that these submissions of the assessee have been recorded in the assessment order itself.

4.2 Adverting to the reasoning recorded by AO, the ld. Authorized Representative submitted that AO is incorrect in observing that an expenditure can not enjoy dual status of being capital in books of account and revenue for the purpose of Income tax. He submitted that such observations of Assessing Officer are incorrect in view of well settled position of law described in the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), wherein it has been held that the question that whether the Assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the Assessee might take on his own rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.

4.3 The ld. Authorized Representative further submitted that the aforementioned position has also been reiterated in the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 wherein Their Lordships have held that "the argument passed on accountancy practice is of little merit, if such practice can not be justified by any provision of the statute or is contrary to it."

4.4 The ld. AR further referred to the decision of Hon'ble Bombay High Court in the case of CIT v. Bhor Industries Ltd. [2003] 264 ITR 180/128 Taxman 626 wherein it has been held that the expenditure which is revenue in nature should be allowed in its entirety in the year in which it has been incurred and it can not be spread over a number of years even though the assessee had written off the same in its books over a period of years.

4.5 The ld. AR also referred to the decision of Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 wherein it has been held that the expenditure relating to the unit of the assessee at Bangalore were allowable despite the fact that unit of the assessee at Bangalore did not start production as the new unit at Bangalore was nothing but expansion of the existing business and there was complete inter-connection, inter-lacing and inter-dependence of both the units.

4.6 The ld. AR further referred to the decision of the Hon'ble High Court of Bombay in the case of CIT v. Kothari Auto Parts Mfg. (P.) Ltd. [1977] 109 ITR 333. In the said case the assessee company had started selling auto parts and incurred certain expenditure in relation to activity of manufacturing of auto parts. Noting from the Memorandum of Association it was observed that the activity of manufacturing related to same business and Memorandum of Association of the company empowered the company to manufacture the items in which it was permitted to deal in and thus these two activities were two separate stages of the same business and the Tribunal was justified in allowing the total expenditure as business expenditure.

4.7 The ld. AR further referred to unreported decision of the ITAT in the case of L'Oreal India (P.) Ltd. v. Dy. CIT in ITA No.6405.Mum/2008 for assessment year 2002-03 dated 11th Feb, 2010. Copy of the order was placed on our record and was given to the ld. DR. In the said case a sum of Rs.48,66,712/- claimed by the assessee as pre-operative expenditure was disallowed. The said expenditure related to capital project of the company undertaken at Chakan, Pune where the then existing manufacturing facilities of the company from Gujarat were shifted. The sum was disallowed on the ground that the same is capital in nature. The Tribunal following the decision in the case of CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC) and decision in the case of CIT v. Rane (Madras) Ltd. [2007] 293 ITR 459/[2008] 170 Taxman 45 (Mad.) and other decisions has held that the same was allowable expenditure as the same was incurred for shifting of old unit from Gujarat to Pune and the expenses incurred on plant and machinery was capitalized.

4.8. The ld. AR further submitted that the ld. CIT(A) for the reasons entirely different from the AO has upheld the disallowance. He produced before copy of the documents submitted before the ld. CIT(A) in response to his queries . It was submitted that all queries raised by the ld. CIT(A) were properly replied. He submitted that the details submitted before the ld. CIT(A) would clearly reveal that the assessee has given all the details which consisted of name of the employee, his job description, TDS deducted out of the amount and payment made to the said employee.

4.9 To sum up his arguments, he submitted that when once business of the assessee has already commenced, which is apparent from the turnover achieved by the assessee, during the year and business of the assessee being one only i.e. running the stores at various places of India and there being inter-connection, inter-lacing, inter-dependent, common management, common business organization, common fund and common administration, the expenditure incurred for expansion of business has to be allowed irrespective of the fact that in the books of account assessee has treated the said expenditure as capital work-in-progress in view of the decision relide upon by him.

5. On the other hand reading from the order of the ld. CIT(A) it was submitted by the ld. DR that assessee has failed to submit the details required by ld. CIT(A) and therefore, assessee could not prove that these expenditures were wholly and exclusively incurred by the assessee for the purpose of its business. Therefore, the ld. DR pleaded that the order of CIT(A) should be upheld.

5.1 In the rejoinder the ld. AR submitted that all details required by the ld. CIT(A) were furnished and it is not even the case of the AO that any expenditure claimed by the assessee was not genuinely incurred by the assessee for the purpose of its business. He submitted that expenditure has been disallowed only on the ground that it is capital in nature and genuineness of the incurrence of expenditure has never been doubted. He submitted that when job description of each of the employees was provided to the Ld. CIT(A), he was wrong in upholding the disallowance on the ground that assessee did not file proof with regard to the services rendered by the employees. Ld. AR submitted that there is no material on record on the basis of which it can be said that assessee did not incur these expenditure wholly and exclusively for its business. He submitted that all these details were also submitted before AO and AO has never expressed any doubt over such expenditure.

6. We have heard both parties and their contentions have carefully been considered. There is no dispute to the fact that the assessee has shown a turnover of Rs.4.75 crores in relation to its stores which were made operational during the year at Bangalore and Hyderabad. Before the AO it was the case of the assessee that it is in the process of expansion of its business and thus this expenditure has been incurred in relation to expansion of business. It was also submitted that the expenditure which are in the nature of salary, electricity, audit fee etc. are essentially incurred for expansion of existing line of business that is setting up of more number of stores/speciality stores under planned format or for maintenance of already established stores. These submissions were made before the AO and have not been controverted by the AO and disallowance is made mainly on the ground that the assessee can not give dual status to these expenditures i.e. as "capital" in books of account and as "revenue" for Income tax purposes. However, such view of the AO can not be upheld in view of the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) wherein it has been held that the issue that whether the assessee is entitled to a particular deduction will depend upon the provisions of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.

6.1 From the submissions made by the assessee before the AO it is also clear that opening of stores at various places was one composite business of the assessee and in that course the assessee had started operation of its stores at Bangalore and Hyderabad. It was the contention of the assessee that operations of these stores at various locations is one composite business and once business had been started then the expenditure can not be linked only to the stores which became operational during the year under consideration. Such submission of the assessee has not been controverted by the AO. All these details were submitted before the AO and it is not the case of the AO that assessee had not incurred such expenditure for its business. In the letter submitted by the assessee before AO it is clearly mentioned that when the expenditure is incurred for the purpose of expansion of business which is already in existence and, which is in the nature of revenue, then the same is allowable as revenue expenditure irrespective of the treatment given by the assessee to such expenditure in its books of account. No material has been brought on record by the AO to negate such submissions made by the assessee. These propositions put forth by of the assessee before AO are supported by the decision of the Hon'ble Bombay High Court in the case of Kothari Auto Parts Mfg. (P.) Ltd. (supra), and the decision of Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra). Therefore, it has to be held that these expenditures incurred by the assessee are for the purpose of expansion of its business and those expenditure are in the nature of revenue (being mostly paid to employees). These are allowable in the year itself as per ratio of aforementioned decision of the Hon'ble Bombay High Court in the case of Kothari Auto Parts Mfg. (P.) Ltd. (supra) and Hon'ble High Court of Gujrat in the case of Alembic Glass Industries Ltd. (supra). These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature. Therefore, we hold that expenditure are allowable in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in its books of account vis-à-vis computation of income filed alongwith return.

6.2 So far as it relates to the observations made by Ld. CIT(A) in his order that assessee vide his letter dated 28/6/2011 has merely given the name, designation and amount paid with reference to salary paid without giving any proof of work actually being done, we may mention that we have carefully gone through the details filed by the assessee before Ld. CIT(A). Copy of the documents submitted before Ld. CIT(A), as mentioned earlier, were filed before us. We find that assessee in the details so filed has mentioned job description of each of the employees alongwith amount paid to him describing also that how much TDS has been deducted. For example job description is described as sourcing product design and development; sourcing and procurement; category management; marketing communication, marketing consumer behaviors; distribution and logistic; sourcing and procuring; talent acquisition buyer etc. etc. In the note which has been filed along with the details it is clearly mentioned that the assessee has employed these persons for carrying out market research work such as to contact various manufacturers and suppliers of the footwear and other accessories; getting base price and delivery schedules as well as comparing the products of various manufacturers of unbranded products with the price and quality of branded products, preparing various reports for this purpose, planning, distribution and logistic, sourcing, designing products, inventory planning discussing consumer preferences for various product range etc. The submissions made by the assessee before Ld. CIT(A) matches with the job description of all the employees. Therefore, it cannot be said that assessee did not provide the necessary details. By furnishing these details, the assessee had placed on record prima facie material to substantiate the query raised by Ld. CIT(A). Without pointing out any defect and without brining any adverse material on record, Ld. CIT(A) has observed that assessee has failed to prove that the expenditure was made wholly and exclusively for the purpose of business of the assessee. Thus there is no basis for recording such finding. Therefore, even for the additional reasons described by Ld. CIT(A), the disallowance cannot not be upheld.

6.3 It is already mentioned that the assessee itself has disallowed a sum of Rs. 51,23,957/- out of the aforementioned amount of Rs.3,64,49,545/- under the provisions of section 40A(7)/40A(9)/43B of the Act. The claim of the assessee as per grounds of appeal is limited only to a sum of Rs. 3,13,25,588/- ( Rs.3,64,49,545 (-) Rs. 51,23,957/-on account of disallowance u/s. 40A(7)/40A(9)/43B), therefore, we hold that an amount of Rs. 3,13,25,588/- should be allowed to the assessee on account of revenue expenditure.

7. In the result, the appeal filed by the assessee is allowed in the manner aforesaid.

The order pronounced in the open court on the 23 October, 2013.